# Three friends each own portfolios consisting of a diversified stock index fund and short term risk-free Treasury bills.

4.  Three friends each own portfolios consisting of a diversified stock index fund and short term risk-free Treasury bills.  The risk-free rate of return is Rf = 4% and the stock market index fund has an expected return of Rmbar = 10% with a standard deviation of σm = 6%.

For each friend, find the portfolio weights for each investment (wm and wrf ), the expected portfolio rate of return, and the portfolio standard deviation of return.

a (12).  Tanya has \$50,000 to invest.  She purchases \$30,000 in stocks, and puts the rest into T-bills.

b. (12) Bruce has \$25,000 to invest.  He borrows an extra \$20,000 from his broker at the risk-free rate, and puts all the funds into stocks.

c. (12) Camille has \$9000 to invest.  She puts all her funds in risk-free T-bills.

d. (14) Suppose after the friends invest, a recession occurs and the actual stock market return is  -20%.  What rate of return will each friend actually earn in this circumstance?  Whose portfolio performed best?

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